However, the President and CEO of Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) is not the main reason why I have the stock in my portfolio. Vice President Charlie Munger is not either – although he is just as entertaining and instructive to listen to. Think of it this way: while we certainly hope that they will stay for a while, the fact that a company is run by 89 or 96 years in particular is not exactly the most sustainable investment thesis for it .
In fact, the reason I plan to hold Berkshire Hathaway shares until I retire (I’m 38) and beyond is precisely because Berkshire Hathaway will do very well, no matter who is looking closed off. The company is designed to generate higher returns than investors in the market with little impact from its CEO.
Berkshire is truly a “ham sandwich” business
In the 56 years since Warren Buffett took control of what was then a struggling textile manufacturer, Berkshire Hathaway has grown into a massive conglomerate with more than 60 subsidiaries. To name a few of the best known, it’s the parent of GEICO, Dairy Queen, Duracell and Fruit of the Loom.
Owning such a diverse array of businesses might seem like endless job creation for a CEO, but it doesn’t. Indeed, Berkshire gives the managers of its subsidiaries great autonomy in the conduct of their operations. For example, although Oksha-based Berkshire owns Dairy Queen, the restaurant chain is headquartered in Minnesota and has its own CEO (Troy Bader) who manages day-to-day operations. There is even a layer between Buffett and the directors of vice-presidents Ajit Jain and Greg Abel, who oversee Berkshire’s insurance and non-insurance operations respectively. (Note: one of these two will likely become the next CEO when the time comes.)
Buffett and the rest of the Berkshire management team play very little role (if any) in the operational decisions of its subsidiaries. Of Berkshire’s 377,000 employees, just over two dozen actually work at the company’s head office – the main function of the team is to allocate capital, not manage the business of the company.
In fact, when Berkshire is considering an acquisition, one of the prerequisites for an agreement is that a strong management team is already in place. Buffett’s general philosophy is to find good managers and not try to change their methods. As he says, “… the important thing we do with managers, in general, is to find the .400 hitters and not tell them how to swing. ”
Buffett described some companies as being so easy to manage that a ham sandwich could be CEO and things would go just as well. And that’s exactly what he built at Berkshire Hathaway.
But what about the equity portfolio?
So far, we’ve discussed Buffett’s involvement – or lack thereof – with Berkshire subsidiaries. But what about the huge equity portfolio?
Berkshire’s equity portfolio is worth more than $ 200 billion, and most of the investments have been hand-selected by Buffett himself. And there is no doubt that he is one of the greatest value investors of all time.
But there is also a plan for this. Its title selection lieutenants, Todd Combs and Ted Weschler, have each received an increasing share of Berkshire’s capital to manage, and results have so far been promising. One of these two was responsible for manufacturing the first Berkshire Apple (NASDAQ: AAPL) buying stock, and the pair is also responsible for bringing Amazone (NASDAQ: AMZN) in the portfolio, to name just a few profitable examples.
Combs and Weschler have been cared for for years to prepare them for the day when they will have to take over Berkshire’s investment portfolio. Not only do they seem to be up to the task, but they will operate largely independent of whoever occupies the office of the CEO.
A compound growth machine with all the right parts in place
As Buffett said in his last letter to shareholders, “Berkshire shareholders don’t have to worry: your business is 100% ready for our [his and Munger’s] Departure. ”
In a nutshell, Berkshire will do what it was designed for, no matter who is at the head office. The operating subsidiaries will continue to generate capital which can be used to acquire more businesses and buy more shares. Not only does each company have its own independent management team, but the people who will guide the part affecting the capital of the company are already in place.
Berkshire has been a fantastic company with Buffett at the helm, and will continue to be as long as he is in charge. But once the Oracle of Omaha is no longer the leader of the business, not much will change – because that’s exactly how he designed it.